Good day, and welcome to the ADNOC Distribution Q4 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the call over to Athmane Benzerroug. Please go ahead.
Thank you very much. Good afternoon, good morning, ladies and gentlemen, and welcome to the ADNOC Distribution fourth quarter and full year 2022 earnings call. I'm Athmane Benzerroug, the Chief Investor Relations Officer. Joining me today are Badr Saeed Al- Lamki', our Chief Executive Officer, and Wayne Beifus, our Chief Financial Officer. In today's call, I will start with the key highlights of the fourth quarter and full year. We will also speak about the outlook for our company. Our CEO will discuss in detail progress on our growth, future-proofing strategy, as well as the sustainability initiatives. Our CFO will take you through the financials, operating and financial results. After the presentation, we will turn on to the Q&A.
Before we begin, I will quickly reiterate our cautionary statement regarding forward-looking statements. This presentation includes forward-looking statements relating to our business. Such statements involve a number of factors that could cause actual results to differ materially from our expectations. I direct everyone to our website to read the full text of the disclaimer and other important information. I will begin the presentation with the key achievements of our company and then briefly talk about, sorry, the outlook for 2023. ADNOC Distribution had a very strong year, which was marked by several milestone in our operating and financial performance, as well as in domestic and international expansion. We have sustained our growth trajectory while generating strong cash flows and maintaining a solid financial position.
The company exceeded its target to open 25-35 new stations in UAE with 42 new stations, including 8 in Dubai. In KSA, we added 26 new stations. Thanks to continued, sorry, rebound in economic activity in the UAE and the expansion of our network, our fuel volumes increased by 8% last year, and our commercial volumes by 20%. We also witnessed a strong momentum in the non-fuel retail business with transactions up 15%, driven by our customer-centric initiatives. This translated into a higher conversion ratio from fuel to non-fuel and higher convenience store gross profit margin. Supported by strong operating performance in the fuel and non-fuel segments, the company generated record earnings last year.
EBITDA increased by 15% to around $960 million, while the underlying EBITDA increased by 17% and the net profit by 22% to around $750 million. This helped to lift the return on capital employed to around 29%, up from 25% in 2021. Finally, the company generated robust free cash flow of around $925 million, up 50% year-on-year, and maintained a strong balance sheet with a net debt to EBITDA of roughly 0.8 times. Regarding the outlook, ADNOC Distribution has demonstrated a proven track record of value creation since IPO by pursuing new opportunities in domestic and international markets and allocating cash towards growth. Following the strong 2022 results, we reiterate our target to reach a minimum of $1 billion EBITDA by 2023.
There are several factors behind our confidence that we will be able to demonstrate further growth. First of all, we expect to open around 25-35 new stations and keep the momentum in our network expansion. Our strong balance sheet and consistent robust cash generation provides support to organic and inorganic investments, including international expansions through value accretive transactions. ADNOC Distribution is on track to complete in Q1 the acquisition of 50% of TotalEnergies Marketing Egypt. The acquisition will be earnings accretive year 1, and on a full year basis, the transaction will bring additional 6% growth to our EBITDA. In 2023, we expect CapEx of around $250 million-$300 million after investing $340 million in 2022, of which around 70% of that amount invested in growth.
The company has successfully renewed its supply contract with ADNOC for the next 5-year term. Similar to the previous contract, ADNOC guarantees ADNOC Distribution, sorry, a fixed-per liter margin structure with downside risk protection throughout this whole cycles, provided by the margin backstop. This reaffirms visible retail fuel margins in the UAE, which account for 70% of our volumes, and reinforces the company's profile as a highly free cash flow generative business. Leveraging on our strength, we focus on future-proofing our business. In the EV space, we recently announced a new mobility JV, E2GO, with the intention to provide mobility and charging solutions to our customers in Abu Dhabi and in the UAE, a wider UAE. Regarding shareholder distribution, the strong momentum in our earnings and cash flows provide a solid base for dividend distribution.
Supported by, first of all, a continued rebound in the economic activity in the UAE, our network expansion, ongoing support from the majority shareholder, international expansion, and new opportunities offered by energy transition. The company's board has recommended a cash dividend of $350 million for the second half of 2022, to be paid in April 2023, bringing the total dividend to $700 million. Our dividend policy for 2023 onwards sets dividend equal at least, so a minimum 75% of distributable profits. Let me finish with the future-proofing of our business. Last month, we have unveiled our sustainability roadmap, including a commitment to reduce the carbon intensity of our business by 25% by 2030. The decarbonization roadmap covers Scope 1 emissions and Scope 2 emissions.
The company aims to cut emissions through a tangible plan with identifying initiatives, including installing solar panels at service stations, use biofuels to power our fleet, and other energy optimization initiatives. We will also utilize green concrete that is eco-friendly and has a smaller carbon footprint than the traditional concrete. We have also unveiled the conversion of our existing loan of $1.5 billion into a sustainable financing. We are the first UAE fuel convenience retailer to tap into sustainable financing. I will now hand over to our CEO, Bader Saeed Al-Lamki'.
Thank you, Athmane, good afternoon, good morning, everyone. Thank you for joining us on this call. In today's presentation, I will walk you through the progress we have made towards achieving our growth plans. Let me begin by the first pillar of our growth, the fuel business, which includes retail and commercial. Our total volumes increased by 12% in Q4 2022 and by 8% in 2022 year-on-year. In 2022, our retail fuel volumes increased by more than 3% year-on-year as we continue to see the post-COVID recovery. After the pump price normalized, we saw in Q4 2022 a 10% increase in retail volumes quarter-on-quarter, driven by higher demand.
Commercial fuel business continued to demonstrate robust performance, with volume increasing in the fourth quarter of last year by 40% and circa 20% in 2022. This material growth was driven by new contracts with corporate customers signed in the second half of last year. As already highlighted by Athmane earlier on this call, we managed to sustain growth trajectory in our UAE network, which expanded by 21 stations in the last quarter of last year. A total of 42 stations in the full year of 2022, which is around 2 times of the 2021 level and higher than our guidance provided a year ago to open 20-30 new stations in the UAE. Our domestic growth was supported by Dubai, where we opened 8 new stations, taking our total network in the Emirates at the end of 2022 to 39 stations.
This includes the opening of our new state-of-the-art flagship service station in Dubai, our first on Sheikh Zayed Road, where we leveraged advanced technologies such as smart cameras and digital screens to deliver a highly personalized and seamless customer journey. The station also offers impressive sustainability credentials, being partially powered by renewable sources. Our combined network in the UAE and the Kingdom of Saudi Arabia increased in 2022 by 13%, amounting to 568 stations in our portfolio. This strong growth will soon be complemented by our entry into Egypt that will help to increase our reach, develop new businesses, and unlock new earnings potential through a diversified portfolio. To pursue further growth, we will continue to explore opportunities in mobility retail in the Middle East and beyond to promote ADNOC Distribution brand and create additional value to our shareholders.
The second pillar of our growth strategy is our non-fuel retail businesses. In this regard, our customer-centric strategy is based on delivering modern, digitally-enabled shopping experience, attractive customer offers in convenience store through a better product mix and the introduction of fresh food and coffee products, lube and car wash, as well as opening of new vehicle inspection centers. Our C-store network increased last year by nearly 5% to 362 convenience stores. In 2022, we opened 28 new convenience stores in the United Arab Emirates. Last year, we have also renovated 42 stores after renovating 50 stores in 2021. Since the beginning of the revitalization program, we have renovated a total of 193 stores over the period of 2020 to 2022.
As a result of our renovation strategy to offer more than digitally-enabled customer journey and in-store experience, our convenience stores show a higher footfall and improved margins. Improving the customer experience through renovation and marketing led to a 15% increase in non-fuel transactions in 2022 compared to 2021. An improvement of 30 basis points in our customer stores margin compared to the prior year. Better customer experience is achieved through a better understanding of what serves the customer the most and what do they value the most, and enhancing of our offerings to meet their needs. Our ADNOC Rewards loyalty program has proven its popularity amongst customers. Nearly 500,000 new members enrolled to the program during 2022, taking the total number of members to 1.6 million loyal customers in our loyalty program.
Convenience, service offering, digital experience, price, and loyalty are all markets of our approach to differentiate ourselves in the market and cementing our position as a destination of choice for our customers. I will now hand over to Wayne to present the highlights of our financial performance.
Thank you very much, Bader. Good morning. Good afternoon, everyone. In 2022, ADNOC Distribution demonstrated a sustained improvement in our operating performance. This was driven by a post-COVID recovery in our fuel business. Our retail fuels, which represent nearly 70% of the total fuel deliveries, increased by more than 3% year-over-year. As already mentioned by our CEO, after the pump prices normalized following the summer peaks, our retail fuel volumes increased by 2% in the fourth quarter compared to prior year, and by 10% quarter-over-quarter. The fuel transactions were also on the rise with a 10% increase in 2022 year-over-year. The high price environment drove more frequent visits, which in turn resulted in a higher number of non-fuel transactions and an overall positive impact on our business.
We recorded a strong pickup in commercial fuel volumes, which increased last year by approximately 20% year-on-year. This was driven by a 35% increase in our corporate volumes, supported by the new contracts. It was also offset by a lower volume in our aviation business. In the non-fuel business, we experienced a solid 15% year-on-year increase in transactions in 2022. This outpaced the growth of fuel transactions and translated into a higher conversion rate. In particular, our convenience store business conversion rate increased from 18% to 19% in 2022. Looking at the key financial highlights, which fully reflect the strength of our operations. In 2022, we reported record EBITDA and net profit. We generated strong free cash flow, and we maintained a robust balance sheet.
Our revenues increased by 54%, supported by higher selling prices, the growth in fuel volumes, as well as higher contributions from our non-fuel business. Our gross profit increased by 18% compared to prior year, driven by the higher fuel volumes, the inventory gains, and the growth in the non-fuel business. Our reported EBITDA grew by 15% to $958 million. Excluding inventory gains and one-offs, our underlying EBITDA grew by more than 17% to $862 million. Our net profit for the year was $748 million, an increase of 22% compared to prior year. This was driven by higher EBITDA and also attributable to the lower depreciation charges as a result of the change in accounting estimates related to useful life of our assets.
Our free cash flow of $923 million was delivered in 2022, and this remained robust and provided support to our balance sheet strength. This resulted in our net debt to EBITDA ratio improving to 0.78 times from 1.06 times at the end of 2021. This offers room for us to continue to invest and grow. While sustaining an attractive dividend policy. I'll now talk you through the performance growth in our gross profit by operating segment. Our total gross profit increased by 18% year-on-year. As I mentioned before, this increase in gross profit was mainly the result of higher fuel volumes and the inventory gains, as well as the growth in our non-fuel business. Our fuel retail gross profit increased by 22%.
This was primarily driven by the higher fuel volumes, inventory gains of $133 million, which compared to $100 million in the prior year. Our non-fuel retail gross profit increased by more than 6% year-on-year. This was driven by our convenience store expansion strategy, as well as the renovations that we went through, and translated into an overall better customer experience, higher number of transactions, and improvement in margins. Specifically, in our convenience stores, our revenue increased by 10% and our gross profit by 11% year-on-year. Our growth strategy has focused on optimizing the product mix, increasing our sales of fresh food and coffee. The bus strategy has contributed to a 30 basis points lift in our margin to 33.6%. Our commercial business gross profit has increased more than 7%.
This as a result of a significant expansion in the corporate segment of nearly 20%, resulting primarily from new corporate contracts that we've written and the overall active spot market we experienced. This was partially offset by the decline in the aviation segment due to lower volumes. Moving on to our EBITDA. For the full year, we generated an overall record EBITDA with 15% increase and an underlying EBITDA increase of 17%. Our retail EBITDA increased by 18%, and our commercial EBITDA was 7% higher year-on-year. Turning to operating expenditure. In 2022, our OpEx, excluding depreciation, increased by 24% year-on-year, primarily driven by domestic and international network expansion, resulting in higher staff costs and other expenses. On a per station basis, our staff costs, which account for roughly 70% of our total cash OpEx, increased by 7%, sorry, by 3% year-on-year.
We remain committed to achieving further operational excellence, we expect to realize like-for-like OpEx savings in excess of $25 million in 2023. We will achieve this through further operational efficiency, drives across the business, through prudent control of our expenses, and through optimization of staff costs with more efficient deployment of staffing levels across our stations and convenience network. Looking at our cash generation. The company reported a solid free cash flow of $923 million for the year, supported by robust underlying profitability. In line with our plans to continue our expansion strategy, we have invested $341 million. We strengthen our financial position with a net debt to EBITDA ratio closing at 0.78x compared to 1.06 in the prior year.
Our strong balance sheet and consistent robust cash generation has provided support to efficient capital allocation towards future growth and shareholder distributions. I'd now like to hand back to our CEO, Bader, for his closing remarks.
Thank you, Wayne. Before opening the floor for the Q&A, I would like to reiterate our key priorities. In 2022, ADNOC Distribution sustained a growth trajectory and achieved record earnings while generating strong cash flows. We maintained a solid financial position, providing support to efficient capital allocation towards growth, including international expansion through value accretive transactions. Our key priorities are accelerating sustainable growth and shareholders value. This could be achieved by delivering on our commitment of a minimum AED 1 billion EBITDA in 2023 through a combination of organic and inorganic opportunities. Efficient capital allocation towards growth, future-proofing our business, and capitalizing on energy transition opportunities by addressing customers' energy needs, exploring potential growth opportunities and new revenue streams, including new mobility solutions such as electrical vehicle chargings. We are also placing sustainability at the core of our day-to-day operations, reducing the carbon footprint and aligning financing to sustainability objectives.
The execution of these priorities will help us to drive higher shareholders value by accelerating sustainable and profitable growth. This concludes today's presentation. We are happy to take your questions.
If you would like to ask a question over the phone, please press star one on your telephone keypad. If you are using a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. Please state your name before posing your question. Again, it is star one if you'd like to ask a question. We will go ahead and take our first question. Please go ahead.
Hi, this is Faisal Al-Azmeh from Goldman Sachs. Congratulations on the strong set of numbers. Three questions on my end. Maybe the first is on the working capital cycle and the free cash flow generation. We saw a very strong free cash flow generation this quarter. What has driven this, and how sustainable is this high conversion ratio? Another question is on effectively the dividend policy, obviously, which is linked to the first question. You had a high level of free cash generation. Should we expect a change to the dividend policy? Should we expect an absolute amount that could be announced at some point?
Thirdly, just when we look at next year's EBITDA target, how should we think about the bridge between this year and next year? Where will this growth mostly come from? Any color on that would be helpful. Thank you very much.
Okay. I think let me take the first part of your question. Thank you. Thank you for the question. Free cash flow is an absolute focus of the leadership team, and as you can see, we've generated very strong free cash flow this year, particularly in the fourth quarter. As a result of the strength in our operating results and obviously, favorable movements in our working capital, of particular focus for the team has been collections as well as our inventory strategy. Overall, it continues to be a key focus. I think, with cash flow, there is clearly a level of efficiency that you can achieve within the balance sheet. We believe that there's still more opportunity to come. I'll maybe hand to Athmane for the second part of your question.
Yes. Thank you very much, Wayne. So first, just on the dividend policy. Let me start with our philosophy and the investment case. This company has a very strong cash flow profile, and this is thanks to the level of margins that we have, but also thanks to the contract that provides us not only a backstop, but also the ability to record inventory gains. Plus the ability of this company to grow and gain market share in the UAE and beyond the UAE, this is on the fuel and the non-fuel retail. This means that earnings increase for us means that there is a strong, very strong balance sheet that can allow any way to distribute healthy dividend. Okay?
This means that in our DNA, there is no reason to see dividend going down. Now, I guess that the management today, our priority is growth and to guarantee a minimum 75% payout, which means that anyway, the level of dividend will continue to be sustained at a certain level. Okay? I guess that we want to find the right balance between the growth and bringing this growth through also shareholder, higher shareholder value and higher shareholder distribution at some point. I hope I answer your, your question. The last one is the AED 1 billion, if I remember well.
Yes. I think I will address that. I think the question was how would you bridge 2022 into 2023 and achieve the aspiration of achieving 1 billion EBITDA? There is multiple avenues here. One is our domestic growth, and that's actually, definitely we are encouraged with increased mobility we have seen since last year into this year. That's the fuel business. Moreover, the NFR side of the business, all the elements that contributes to our NFR domestically are also an area of focus, and we have plans to grow those, whether it's the car wash, the lube, and the rest of our NFR activities.
Secondly, is our international growth, we are indeed looking forward to achieve financial close of our entry to Egypt in Q1 of this year. That is a value creative transaction and definitely looking forward to consolidate the contribution from this transaction. We remain attentive to growth through, international growth, prioritizing value creative transaction regionally and internationally. Moreover, we are also looking at new revenue streams. EV ambition was launched recently in a partnership with a JV, we will continue to push forward identification of new revenue streams into our business. Lastly is our OpEx efficiency.
We will remain laser focused, driving efficiency across all our operation. Definitely that would contribute to our financial performance for the year. Multiple avenues. Management is very experienced and very focused and will continue to drive the business towards achieving our guidance to the market.
Again, it is star one. If you would like to ask a question.
We will take our next question. Please go ahead.
Hi. Good evening, gents. Thanks very much for the opportunity. Just a couple of questions from my side. Your EBITDA guidance of $1 billion for this year, should we think of that as growth coming from your underlying EBITDA of $862 million or from the reported $958 million? That is one. Kind of back to your dividend. Your policy for 2023 is 75% of distributable profit. I'm just wondering how exactly do you define distributable profit? Perhaps you can tell us what was that number for 2022 for reference. Thank you. Hello?
Yes, yes. So Wayne, Do you want to start, or you want me to start? It's up to you.
Just the first part of the question is unclear. Could you just repeat the first part of the question, please?
Sure. Your EBITDA guidance of $1 billion for 2023, should we compare that as growth from your reported EBITDA of $958 million for 2022 or the underlying EBITDA of $862 million?
Okay. Okay, c lear. Thank you. Thank you for the question. I think the reason why we show the underlying is it strips out the one-offs, and it strips out the inventory gains. Inventory gains are subject to price movements within the market. It's very important to actually strip that out. At the same time, we can anticipate having some level of inventory gains given that we do have a supply contract in place that serves to guarantee margins for us. However, it's very important to remember that our growth is going to come from a combination as our CEO said a little bit earlier, of our organic business, so a strong focus on growing and sweating the current business. That is across the three geographies that we now.
That we will be occupying in 2023, as well as possible inorganic opportunities that we could be looking at in the future.
That is clear.
Just for the, for the second part of your question, could you repeat that, please?
Sure. Your dividend policy for 2023 is 75% payout on distributable profit.
Yeah.
I was just wondering, how do you define distributable profit? You know, if you could give us what that number was for 2022?
Okay, let me take this one. When we speak about distributable profits, we look at the combination of factors. One is the level of the balance sheet. Two is the level of distributable earnings. Today the distributable earnings are above $550 million. The level of cash. Today the cash is close to $800 million, $750 million. It's a combination of all this, meaning that there is ample room to pay very decent dividends. Last year, I guess if you just look at our own balance sheet last year, we're around the same levels and we guaranteed the $700 million. Okay.
Okay. All right. That's understood. I mean, just one thing to reiterate from your previous comments, is it a reasonable expectation that BPS should be maintained in 2023? Assuming your guidance is met.
Sorry, I didn't catch your question.
Would it be a fair assumption to say that if your guidance is met in 2023, then the dividend per share could remain stable?
Well, today, the guidance and the dividend policy is a minimum 75% payout, of the distributable income. Minimum 75 means that it can be much higher than the 75. This is what it means. Again, I reiterate what I said. The balance sheet today and the cash flow generation, distributable earnings, with this, we are very confident on the level of dividends.
Okay. Thank you.
It appears we have no further phone questions.
Okay. Let us just start with the questions from the web. Give us just a sec to read it. Okay, let me start with the first question from the web. The question is on the non-fuel transactions growing 15% year-on-year, is it volumes of value? This is volumes, so number of transactions. Put in another way, how much of this 15% was inflation driven? It's not actually. We are talking about the number of transactions. Let me just look at the other questions. Okay, the next question is your guidance of 25-35 additional stations only in the UAE or UAE and KSA for 2023? Bader, if you want to.
That is an overall target for the, for the company, and we will be pursuing it during 2023. It's an overall target.
Okay. Let's have a look at the next question. The next question is, what is the impact of fuel retail price weakness in Q4? The pump prices were lower in Q4. So what we have seen in Q4 is that our retail fuel volumes increased by 10% quarter-on-quarter as the pump normalized post summer peak levels. Of course, our margins are margins per liter, which we just fixed margin. It's just what I need to just mention. The impact was positive with a 10% increase. Last question. Okay. The next question is why are the aviation volumes down despite the fact that the sector is returning to 2019 levels?
You know, I think we are servicing a strategic customer and not the commercial customer. Our business is mainly with the army of United Arab.
Yeah. The next question... Okay, we have two other questions. What are the reasons for lower gross margins in the commercial business in Q4, and the reason for increasing the useful life of certain fixed assets? I will just hand over to Wayne, please.
Okay. Let me take the first one. The actual commercial business volumes were higher in Q4 as we secured increased number of contracts. What we also saw, though, was a much lower activity in the overall market as prices were dropping. Net all up, the overall margin itself has reduced, but the volume was significantly higher. In terms of the second question. The second question related to the reason why we increased the useful life of our assets. In line with accounting standards, specifically IAS 16, there is a requirement to periodically review the estimated useful life of assets. This exercise was concluded, and the result of that is those assets which required a useful life adjustment together with our signed off and approved by our auditors, we went through that exercise and completed that.
Thank you very much, Wayne. Thank you. Would you consider unlocking options such as sale and leaseback of fuel stations and convenience stores? Just a sec. The short answer is that we are operating under the COCO model. This answers the question. Company owned, company rates. Okay. The last question we have is, why did the profitability fall in Q4? The underlying EBITDA is flat despite the growth, while it's up 17% for the full year. Okay. So in Q4, actually, let me start with Q2, Q3, actually, where we had substantial inventory gains and temperature gains. In Q4 it was not the case. Okay? This is the reason why the margin was lower.
Despite this, what I just want to highlight is that the level of margin in Q4 are still very high, which is 44 fils per liter. Okay? 45 exactly in Q2. They were exceptionally high in Q2 with roughly 71 fils, of which around 20 fils were coming from the inventory gains. This is the reason. I guess we have no further questions. Do we have any questions from the people on the line?
We have no phone questions at this time.
Okay. Thank you very much. I hope to see you again in the next quarter. Of course, we are gonna meet a couple of people in the next weeks. Thanks again for attending this call and good afternoon. Thank you. Bye-bye.
Thank you, and thanks for your attendance.
With that does conclude today's call. Thank you for your participation. You may now disconnect.